By David L. Bahnsen
Monday, July 03, 2017
For the last year or so, the general public has largely
tuned out a story of great significance to our political, financial, legal, and
lobbyist classes. When a news story is couched in too much bureaucratic
alphabet soup, it will always struggle to gain much traction with readers, and
this story certainly fits the bill.
The so-called DOL (Department of Labor) Fiduciary Rule,
passed under the Obama administration, resulted from the executive branch’s
determination that the Securities and Exchange Commission was failing to carry
out one of its responsibilities, and from the White House’s subsequent, legally
dubious decision to usurp that responsibility. So it was that the Department of
Labor came to decree that those engaged in the delivery of financial advice as
regards retirement-investment accounts (401ks, IRAs, pension funds, etc.)
needed to be held to a “fiduciary standard,” which is to say, they needed to be
legally required to act in their client’s best interests, except when they
didn’t need to.
Confused yet? I thought so. Some explanation is in order.
It can be hard for a layman to make heads or tails of the
investment products and advice industry in the United States. Brokers are regulated by an independent
body called FINRA (Financial Industry Regulatory Authority) and are not
required to act in a client’s best interests. They work for the firms who
employ them and are merely required to provide “suitable” recommendations to
the clients they serve. When an investment product they recommend is
“suitable,” they have done their legal duty, even if a better product was
available at a lower price. Conflicts of interest abound in the world of
brokers, and they need not be disclosed, let alone avoided. There are bad
actors in this space, no doubt, but there are plenty of good actors, too, who,
no doubt, act as if they were a fiduciary, even though legally they are not
required to do so.
After the 2008 financial crisis, the SEC was tasked with
deciding whether the standard that applied to registered investment advisers (RIAs) should be applied to brokers.
RIAs are held to the highest standard of care for clients, treated as legal
fiduciaries, meaning that the very best interests of their clients must be
their governing consideration, conflicts of interest must be intensely avoided,
and those that can’t be avoided must be thoroughly disclosed. In fact,
disclosure is at the root of most of this controversy, as RIAs have strict
requirements to disclose all compensation, whereas brokers don’t.
Now you may be thinking what I am thinking right about
now: If consumers want to work with someone who does not legally have their
best interests in mind, let them — buyer beware and all that. The problem,
though, is that the investing public generally has no idea who is wearing what
hat when they meet with various financial-services providers. There is, in
other words, tremendous confusion over whom each stockbroker or insurance
salesman owes his loyalty to.
Addressing this confusion was, in fact, the genesis of
the whole DOL Fiduciary Rule mess. In 2009, as the country was still feeling
the aftershocks of the financial crisis, the Obama Treasury Department proposed
that the SEC establish a fiduciary standard that would bind both brokers and
RIAs. But the SEC is not overseen by the Treasury Department and had no mandate
to act on the recommendation, so Congress took it upon themselves to
“authorize” (but not order) such action in the 2010 Dodd-Frank law. The SEC
issued reports, created committees, sought feedback, and held symposiums until
2013, but never acted. Finally, in 2015, shortly after Tom Perez had been named
secretary of labor by President Obama, the Labor Department set out to
accomplish what the SEC had not, despite its obvious lack of legal authority to
do so. By 2016, after extensive negotiations and watering down and altering and
opportunities for political theater, the DOL Fiduciary Rule was released.
The rule, needless to say, turned out to be a textbook
illustration of the folly of government intervention. The original purpose of
this effort had been to “protect investors” — a fair and noble goal. But by the
time the DOL’s final rule was released, it had so many caveats, exceptions, and
gray areas that it critics called it a “Swiss-cheese ruling.” It claimed to
implement a “fiduciary standard,” and succeeded in getting the same Wall Street
brokerage firms that have functioned as non-fiduciaries for decades to take out
advertisements boasting that they were now doing what was best for their
clients — but neglecting to mention that their best still applied only to half
of said clients’ money, and that they’d only been forced to go even that far by
government edict. Meanwhile, the very intelligent, sophisticated financial
firms that function outside the fiduciary world did what they do best: They
quickly figured out how to make more money off the new rule.
Then, a wrench got thrown into the pile: President Trump
was elected. All of a sudden the entire ruling was left in doubt, given its
dubious legal foundation, and the new administration had new departmental
priorities and interpretations of how the rule should be implemented. Lawyers
sent out new rounds of suggestions, the media updated all of the headlines on
the subject, and questions intensified as to what exactly was going to happen
and when. In Senate testimony last week, SEC officials made clear that they
remain interested in working with the Department of Labor to make some form of
a fiduciary standard a reality. Billions of dollars are at stake for trial
lawyers anxious to find gray areas in the language that can be exploited for
litigation purposes.
From the vantage point of yours truly, a registered investment
adviser already firmly held to the fiduciary standard both morally and legally,
and therefore having no real dog in this fight, the very sad reality is that
this battle shouldn’t have been fought in the first place — the problem it was
intended to solve could have been better addressed by simply redoubling efforts
to educate consumers. A free and open marketplace where transparency and choice
existed was always the right solution. Instead, we saw the heavy hand of (a no
doubt well-intentioned) government intervene, touching off an intragovernmental
bureaucratic competition that only served to further muddy the waters. The end
result was a poorly constructed ruling that did not accomplish what it set out
to accomplish and may never be implemented.
What now, then? Don’t investors still deserve to know
whom their “adviser” really works for? Don’t they still deserve to know that
they’re receiving advice that serves their best interests, and to be aware of
just how much that advice is costing them? Of course, but governmental
regulation is not the best way to make it so. Does anyone believe that a
professional practitioner who has to be told by the government not to rip off
his clients is going to suddenly become honest just because the government told
him to? Fiduciary, non-conflicted advisers have a compelling story to tell in
the public market, and no doubt they will do just that. Investors can ask
exactly how their adviser is paid, and what standard of care he is legally
obligated to provide them, and then make their own decision. Honest
practitioners will win this fight the way they have been winning it for years
now: by providing non-conflicted advice and running an independent-minded
business that puts their paying clients at the top of the totem pole.
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